Private equity performance improved in the first quarter of 2023, posting a preliminary 1.5% gain after a 3.9% correction in 2022.

  • Private equity performance up 1.5% in Q1 2023
  • Transaction volume slump may be distorting data
  • Inflation and weak growth threaten valuations over next 12 months

July 25 (Preqin News) – Private equity performance improved in the first quarter of 2023, posting a preliminary 1.5% gain after a 3.9% correction in 2022. But according to new research from Preqin, it would be premature to call it a turnaround in the direction of private market valuations. 

Buyout entry multiples have also risen in H2 2022, particularly in North America where the average multiple of EV/EBITDA rose to 15.7x in the final quarter of that year, the highest level in more than five years. Globally, the average quarterly buyout entry multiple in 2022 was 13.0x the same as 2021, but higher than the average of 11.1x for the prior five years (2016–2020).

However, Angela Lai, Head of APAC and Valuations, Research Insights at Preqin, and lead analyst in Private Asset Valuations: Q4 2022/Q1 2023, has cautioned against an over-optimistic interpretation of the data. 'While the increase in entry multiples would seem in line with the direction of public markets at the end of last year, we believe this alone does not yet conclusively indicate a recovery in private asset valuations,' she said. 'Private equity transaction volumes are still very low, declining by 56% in the first half of 2023, reflecting a weaker appetite for deals. Transactions that have materialized may be more representative of assets that are performing better and hence achieving higher valuations.'

In most instances, private equity GPs can hold on to assets rather than realize them at reduced multiples. In venture capital (VC), where early-stage companies’ need for capital means funding rounds must be completed regardless of valuation, the proportion of down rounds (funding at a lower valuation than the preceding round) increased to 9.5% in Q1 2023, above the average of 7.2% in 2017–2022.

Lai concluded: 'Despite some positive indicators in the data, the weaker appetite for deals and the resulting thin transaction data is blurring the outlook. Even with interest rates hypothetically peaking, inflation remains high and slower economic growth expectations continue to present an uncertain and challenging environment. For these reasons, we see further downside risk to private equity and VC valuations over the next 12 months.'

 

The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.